Apple just pulled the plug on its electric car effort as Nvidia’s valuation continues to increase to a point where it may soon pass Apple’s.
From a financial performance perspective, both companies are near the top. Apple and Nvidia saw the opportunity for autonomous self-driving electric vehicles, but while Nvidia’s efforts were highly successful, Apple had to exit its late attempt to pivot to AI. I expect this, too, will fail because, typically, tactical companies have serious problems competing on strategic initiatives because they enter too late.
Let’s talk about the differences between tactical and strategic management. Both can be successful but require quite different approaches. We’ll look at examples this week and close with my Product of the Week, a prototype laptop from Lenovo with a clear screen that caught my interest at the Mobile World Congress.
Nvidia vs. Apple on AI and Self-Driving Electric Cars
The initial ramp to AI and self-driving cars for Nvidia began at the beginning of this century. Over the following decades, Nvidia realized that to be successful, a great deal of infrastructure would need to be developed — including specialized workstations, simulation platforms like Omniverse, and far stronger AI capability than was possible back then.
This strategic endeavor cost the company millions over the years and is only now paying off in spades, allowing Nvidia to ramp up so rapidly in valuation that it may outstrip every other technology company.
But this master plan was far from risk-free. At any time, Nvidia could have found itself flanked by another company or technological breakthroughs that might have made its effort obsolete before getting it to market.
This scenario demonstrates the risk and cost of a strategic approach. You have to invest massively for years before you can productize the result, and if you guessed wrong or some other company executes better and steals your idea or convinces buyers it has or will have a better solution, that investment would have been wasted. This approach takes a ton of courage and an extremely high willingness to accept long-term risks.
Years later, Apple looked at Tesla, which was built using Apple’s model, showcasing that this model could work well in the automotive industry. After a reported failed attempt to acquire or merge with Tesla — which would have been a far better path — Apple decided to follow Tesla into the self-driving electric car market.
Microsoft Xbox, Zune, Phone
Microsoft’s Xbox effort showcased how to do tactical right. It was concerned that Sony might use its PlayStation platform to displace Windows PCs with appliances and moved to block that effort with Xbox.
Steve Ballmer managed the move, sparing no expense to ensure success. After massively outspending a typical strategic effort like Nvidia’s in a brief period, he created a successful alternative to Sony’s offering, which continues today despite receiving far less support.
Subsequently, when it came to Zune and the Windows Phone, also managed by Ballmer, Microsoft seemed to throw out its successful Xbox plan and underfunded the Zune and phone efforts. That failed badly because Ballmer was unwilling to spend what was needed to be successful.
Microsoft spent billions (it bought most of Nokia), but that money was wasted, showcasing that if you aren’t willing to spend what is needed to be successful, your best path is to stay out of that market because all you’ll do is waste money.
Sunk Cost and Timing
When Tim Cook decided to exit the autonomous electric car effort, he showcased what many executives don’t seem to get, which is the concept of sunk cost — an expense you’ve incurred and cannot be recovered and, therefore, should have no bearing on future decisions. You only factor in what you still need to spend and whether that will be worth the risk.
Cook looked at the electric car market and realized correctly that Apple was simply too far behind, and, with the demand for these cars slowing, the risk of catastrophic failure would be too great. So, Apple exited that market and shifted instead to AI investments. Here, too, it’s far behind. It would make more sense for Apple to invest in or buy an AI company like Microsoft is doing to close the gap between where it needs to be and where it is.
I should point out that with Siri and then later with Apple’s IBM partnership, Apple had two opportunities to invest strategically and get ahead of the curve, but it hasn’t been operating strategically since Jobs’ departure. Unless Apple massively increases its investment and buys into an existing technology, its AI efforts will likely be too little and too late.
Tesla Strategic Thinking
Another example of strategic thinking is Tesla. Had it just brought out electric vehicles and not built out a huge public charging ecosystem, Tesla would be out of business now rather than one of the most highly regarded auto companies. It realized that to be successful, EVs needed places to charge that weren’t in homes.
Because no other car company seemed to get this, Tesla was able to jump way ahead of the other car companies who are still struggling to be successful with electric cars because they, too, operated tactically and under-invested.
Had every other electric car company (with the now growing perception that Chinese car companies are doing electrics right) simply decided not to do electric cars yet, they’d be in better financial shape than they are currently. It wasn’t that electric cars weren’t coming. It was that when you are behind, you must out-invest the leader because you are coming from behind.
When you are a market leader like Tesla, everyone competing with you must spend more and move more quickly because you are ahead. That doesn’t mean you can kick back, but it does mean that competitors, like Microsoft did in the Xbox example, must outspend you to catch up. If you aren’t willing to do that, you’d be better off looking at a different market than wasting money in an unsuccessful effort to catch a leading vendor without adequate funding.
Prince Parfait